The Tax Cuts and Jobs Act and Wayfair : Their impacts on private - - PowerPoint PPT Presentation
The Tax Cuts and Jobs Act and Wayfair : Their impacts on private equity January 23, 2020 Todays presenters Jeremy Sikkema Brett Bissonnette Tony Israels Senior Manager, Tax Transaction Senior Manager, National Tax Office Senior Manager,
Their impacts on private equity
January 23, 2020
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Brett Bissonnette
Senior Manager, National Tax Office brett.bissonnette@plantemoran.com
Tony Israels
Senior Manager, State & Local Tax tony.israels@plantemoran.com
Jeremy Sikkema
Senior Manager, Tax Transaction Advisory Services jeremy.sikkema@plantemoran.com
Nevra Kreger
Partner, Private Equity nevra.kreger@plantemoran.com
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Founded in 1924, Plante Moran is among the nation’s largest certified public accounting and business advisory firms. With more than 3,100 professionals in 25 offices, we provide a wide range of services to
including our investment bank, P&M Corporate Finance (PMCF). Our private equity practice delivers financial, tax, strategy, operations, and technology expertise throughout the private equity life cycle. Assess — Strategically evaluate targets Close — Efficiently close transactions Grow — Define priorities and create value Exit — Minimize surprises and reducerisk
525+
private equity clients
1,000+
portfolio company clients
380+
private equity industry experts
350+
deals annually
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Do you believe that your portfolio companies have properly addressed economic nexus and Wayfair?
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South Dakota v. Wayfair, Inc., U.S. S.CT., Dkt. No 17-494 (decided June 21, 2018)
$100,000, or if the seller has 200 or more separate transactions into the state in the preceding or current calendar year.
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U.S. Supreme Court decision
South Dakota.
law:
physical presence.
“substantial nexus.”
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Impact
Missouri) have enacted economic nexus provisions as of Oct. 1, 2019.
Arkansas Connecticut Hawaii Illinois Indiana Kentucky Maine Maryland Michigan Minnesota Nebraska Nevada New Jersey North Carolina Ohio Rhode Island South Dakota Utah Vermont Virginia Washington Washington D.C. West Virginia Wisconsin Wyoming
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Impact
thereafter)
would be the equivalent of South Dakota’s threshold being $2,250.
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Transaction and sales threshold must both be met for a filing requirement.
Alabama Arizona California Colorado Idaho Iowa Kansas Massachusetts* Mississippi New Mexico North Dakota Oklahoma Pennsylvania South Carolina Tennessee Texas
*As of 10/1/2019
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Challenges
Tennessee, Vermont, Washington D.C.)
count
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Considerations
apply to an activity with “substantial nexus” with the state.
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Changes (Already?!)
imposing economic nexus:
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DOR originally issued guidance for $100,000 threshold. Legislature increased it to $500,000 on April 30, 2019 — one month after the provision went into effect.
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Original thresholds of $250,000 to be lowered to $100,000 Jan. 1, 2020
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On Oct. 1, 2019, the State is changing threshold from $500,000 AND 100 transactions to $100,000 (dropping transaction threshold)
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Originally had a threshold of $300,000 raised to $500,000 on June 28, 2019
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Dropped transaction threshold
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Originally had threshold of only $10,000, but raised it to $100,000 (OK as of Nov. 1, 2019)
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Extreme examples
fullest extent permitted by law.”
2019, with no sales or transaction threshold.
1989 and Wayfair simply made it enforceable.
retroactivity), but its claim leaves the door open.
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Extreme examples (cont.)
saying none of its in-state businesses are subject to out-of-state remote seller sales tax.
into the state have to collect and file sales tax.
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More guidance needed regarding:
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What about cities?
Recently, Nome passed an ordinance imposing sales tax on remote sellers with $100,000 in sales and 100 transactions.
was uniformity and a central filing system.
sales tax.
facilitator collection.
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What we can expect
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CA, CO, CT, MI, NYS and TN have had thresholds based on property, payroll and/or sales sourced to their state.
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PL 87-272 still applies to protect clients from paying tax based on net income.
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PL 86-272 doesn’t apply to minimum taxes (e.g., CA) or to other types of taxes
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TN has thresholds based on property, payroll, and sales.
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OH, TN, and WA have thresholds based on property, payroll, and/or sales.
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OR has recently passed legislation imposing a gross receipts tax.
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Expect other states may follow suite to by-pass PL 86-272.
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Movement already
to income tax.
tax applies to franchise tax.
tax now applies to all business and occupation (gross receipts) tax.
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impact according to them
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qualified property placed in service (PIS) before Jan. 1, 2023 — Percentage reduced by 20% each year PIS until Dec. 31, 2026
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meets requirements:
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Taxpayer hasn’t acquired property from related person within meaning of Section 267 or 707(b)
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Member of controlled group hasn’t acquired property from another member of same controlled group
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TCJA changes to IRC Section 179
Section 179 from $500,000 to $1M. The phaseout threshold amount increased from $2 to $2.5M.
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If placed in service
And before: Pre-TCJA applicable bonus percentage: Post-TCJA applicable bonus percentage: 09/27/2017 01/01/2018 50% 100% 01/01/2018 01/01/2019 40% 100% 01/01/2019 01/01/2020 30% 100% 01/01/2020 01/01/2021 100% 01/01/2021 01/01/2022 100% 01/01/2022 01/01/2023 100% 01/01/2023 01/01/2024 80% 01/01/2024 01/01/2025 60% 01/01/2025 01/01/2026 40% 01/01/2026 01/01/2027 20%
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Have you noticed any of your companies having interest expense limited?
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Business interest expense deductions are limited to:
Adjusted taxable income is equal to taxable income:
deduction, and capital loss carryovers/carrybacks
(no longer added back after 2021)
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partners on Schedule K-1s
in their partnership interest
reporting
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tests at each level.
exists in holding companies.
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interest expense … arising from a self-charged lending transaction that may be allocable to the owner, to prevent such business interest … expense from entering or affecting the section 163(j) limitation calculations for both the lender and the borrower … ”
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by Section 382 limitation post-acquisition of C and S corporations
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Specified assets held less than or equal to 3 years Specified assets held greater than 3 years API held less than or equal to 3 years Gain attributable to specified assets and/or sale of API is short-term capital gain Gain attributable to specified assets and/or sale of API is short-term capital gain API held greater than 3 years Gain attributable to specified assets is short-term capital gain Gain on sale of API is long-term capital gain Gain attributable to specified assets and/or sale of API is long-term capital gain
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(except REIT dividends).
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Like every good meal, the maximized QBID deduction results from a proper mixing of the ingredients.
detailed calculation is not prepared:
level, only, and assumes that overall taxable income is more than $321,400 in 2019; otherwise, income is the only factor.
5 parts - income and either 2 parts - wages or 1 part - wages and 20 parts - UBIA
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athletics, financial services, or brokerage services
employees
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Holdco LLC Investors Intermediate Business 1 Business 2 Foreign business GP MGMT
Do both businesses qualify? Is management a specified service? Is QBID accounted for in tax distributions? Foreign income and FTC planning? Sufficient wages or asset basis? 45
to your investors
returns
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Are you planning to use an opportunity zone to defer gain on a recent sale?
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tracts/geographic areas
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SALE INVESTMENT Basis increased by 10% of the deferred gain; Up to 90% taxed Basis increased by 5% of the deferred gain; Up to 85% taxed Basis is equal to fair market value. Forgiveness of gains
investment; requires an election
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029
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2019 2020 2021 2022 2023 2024
Taxpayer enters into a sale that generates $1M of capital gain.
(Within 180 days), taxpayer contributes entire $1M of capital gain to a qualified opportunity fund.
basis in its QOF investment.
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2024 2025 2026 2027 2028 2029
(After 5 years), taxpayers basis in investment in QOF increases from $0 to $100K.
(After 7 years), taxpayer’s basis in investment in QOF increases from $100 to $150K.
$850K of the 1M of deferred capital gains are taxed and the basis in QOF investment increases to $1M.
(After 10 years), taxpayer sells its investment for $2M. Basis in the investment is deemed to be FMV. The effect is no tax on appreciation in investment.
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Entity type C corp – earnings distributed Partnership/ S corp – no QBID Partnership/ S corp – full QBID (Effective tax rates (assuming the highest marginal rates) Current tax rate 21.0% 37.0% 29.6% Tax on distributions 23.8% 0.0% 0.0% Effective tax rate: Combined 39.8% 37.0% 29.6% Effective tax rate: Combined —prior law 50.5% 39.6% 39.6%
Specific changes driving entity choice analyses:
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transactions are taken into account.
make up for exit cost
excess business interest expense position, allow for state tax deductions, and do not include complicated K-1 reporting
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Brett Bissonnette, Senior Manager, National Tax Office
Brett has practiced law and public accounting for over 20 years. He primarily uses his past experience in litigation and accounting to provide tax consultation services to Plante Moran’s clients. Brett plays an extensive role in connection with various practice areas related to private equity, including due diligence, transaction structuring and reporting, transaction cost analysis, and tax controversy.
Jeremy Sikkema, Senior Manager, Tax Transaction Advisory Services
Jeremy is a senior tax manager and leader of Plante Moran’s tax transaction advisory services group. He has more than nine years of public accounting experience, specializing in federal and state tax compliance and tax due diligence. He also has considerable experience with state and local taxes and transaction structuring. Many of Jeremy’s clients are portfolio companies of private equity groups that are active in mergers and acquisitions.
Tony Israels, Senior Manager, State & Local Tax
Tony is a senior manager in Plante Moran’s state and local tax practice. He specializes in providing clients with multistate tax consulting services, including implementation of solutions to minimize sales and use taxes, income and franchise taxes, and property taxes. Tony is the SALT lead member in the firm’s tax due diligence team. He works with all types
corporations, and LLCs.
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Nevra Kreger, Partner, Private Equity
Nevra serves middle-market private equity-owned organizations throughout the life cycle
compliance to provide tangible recommendations that improve their business and minimize risk. Her expertise includes due diligence, opening balance sheet valuation, purchase price allocation matters, stock options, and other equity-based compensation. She specializes in professional and business services firms, but also serves Michigan K-12 clients and performs employee benefit plan audits.
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Nevra Kreger
Partner, Private Equity
nevra.kreger@plantemoran.com
Brett Bissonnette
Senior manager, National Tax Office
brett.bissonnette@plantemoran.com
Tony Israels
Senior manager, State & Local Tax
tony.israels@plantemoran.com
Jeremy Sikkema
Senior manager, Tax Transaction Advisory Services
jeremy.sikkema@plantemoran.com